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Silent Inflation

Inflation targeting is supposed to reduce uncertainty about prices. But keeping the inflation target at 2% or more, might actually increase a sense of uncertainty about real things like home values or investments.

NEW HAVEN – In many countries, inflation has become so low and stable in recent decades that it appears to have faded into the woodwork. Whereas galloping inflation was once widely viewed as the number one economic problem, today most people – at least in the developed countries – hardly ever talk about it or even pay attention to it. But “silent inflation” still has subtle effects on our judgment, and it may still lead to some consequential mistakes.

Since New Zealand’s central bank set the first example in 1989, monetary authorities around the world have increasingly pursued a policy of setting inflation targets (or target ranges) that are substantially above zero. That is, policymakers plan to have inflation, but steady inflation. What used to be a dirty word is now announced publicly, and moderation is enforced.

Central Bank News tabulates these targets for 68 countries. The European Central Bank targets annual inflation in 2018 at “below, but close to, 2%.” In Canada, Japan, South Korea, Sweden, the United Kingdom, and the United States, the 2018 inflation target is 2%. China and Mexico target 3% annual price growth. In India and Russia, the target rate is 4%. It is 5% in Ukraine and Vietnam, and 6% in Azerbaijan and Pakistan.

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